how-social-security-works

Yes, it’s time to replace Social Security, not fix it

Yes, you read it correctly.  Here are the words politicians are unwilling to utter.  Democrats have made it clear they wish to preserve it while many Republicans have argued for partial privatization.  Bernie Sanders has launched a campaign attacking the Koch brothers and organizations who have questioned the viability of Social Security and suggested fixes, claiming they want to “destroy” it.  Sanders, meanwhile, has pledged to expand it.  Are concerns about the programs viability legitimate or is it all Koch-funded propaganda?

Signed into law in 1935, Social Security now encompasses a group of social insurance plans that help protect the elderly and disabled from dire straits – by most accounts, a noble endeavor.  Medicare and Medicaid were added in 1965.  Unfortunately, with a growing number of elderly and disabled, the financial stability of the program has been challenged.  Since 2010 SS has been in a severe negative cash flow position and estimates show the disability fund may run out of money as early as 2016 (that’s next year for those of you not paying attention) and the retiree benefits by 2034.  After that, income will lag behind benefit liabilities.  While Senator Sanders and others blame the Kochs for misinformation, the Social Security website says as much:

“The last 5 Trustees Reports have indicated that Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) Trust Fund reserves would become depleted between 2033 and 2037 under the intermediate set of economic and demographic assumptions provided in each report. If no legislative change is enacted, scheduled tax revenues will be sufficient to pay only about three fourths of the scheduled benefits after trust fund depletion.”

MEANING, it will require 100% of the contributions of current workers to fund current retirees and that will only be enough to pay 75% of the benefits. If the ratio of retirees to workers grows, the problem will get even worse.    Further, Social Security Disability Insurance (SSDI) that will be bankrupt by next year has got even bigger problems because the number of recipients has quadrupled since 1970 and as Reason.com explains,

“the statistics show large increases in applications for disability benefits when the economy is struggling and unemployment is rising but fewer applications when the situation is reversed,  Given that people obviously don’t become more or less disabled depending on how the economy is performing, it means that people are using the program as a form of unemployment insurance.”

This is not a situation completely unique to the United States.  We are living longer and the demographics that existed in the  post WWII-boom with a larger number of younger workers and a smaller number of retirees has turned upside-down.  Countries that are heavy on entitlements and haven’t prepared for this change are facing economic disaster along the lines of Greece.

Is this something that can be fixed or is there a better way?  Of course there are ways to make the existing system last longer but that doesn’t address the more fundamental question of whether or not it’s the best way to provide social insurance for the elderly and disabled.

Most people do not understand how SS actually works.  In theory, and many presumably believe in practice, a worker’s contributions to SS would be kept in an individual account and put aside for retirement or other need.  Many Americans believe this is how it works, along the lines of Al Gore’s famous “lock box.”  That is not the case.  Social Security checks do not represent a return on invested capital and as Pew Research points out, “the taxes paid by today’s workers and their employers don’t go into dedicated individual accounts (although 32% of Americans think they do).”

According the the SS website, “tax income is deposited on a daily basis and is invested in “special-issue” securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.”  The SS trust fund therefore has no money in it long term as the cash is converted to debt notes and bonds.  The money itself then becomes available to Congress for spending as with all other tax revenue.

The government then depends on the sale of securities in order to fund retirees, along with the taxes of current workers.  A program that assists seniors in the needy is certainly a distinguishing factor of a civilized society but the problem is twofold:  one, in that the program is not fundamentally structured in a simple way that provides individual retirement benefits and as such, gives a very limited returns.  In addition, the program has run out of money in the past and is going to again unless changes are made.

Of greater concern and unknown to most Americans, legally no one is actually “entitled” to their benefits, meaning the government is not legally obligated to pay them.   As early as 1937 in Helvering v. Davis the Supreme Court ruled that Social Security was not a contributory insurance program, saying, “The proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.”  Even more alarming, in 1960 regarding Fleming v. Nestor, the Supreme Court ruled that citizens don’t have a right to Social Security benefits even if they paid into the system and Congress can change the rules at any time.

In essence, as Michael Tanner of the Cato Institute accurately points out, “Social Security is not an insurance program at all. It is simply a payroll tax on one side and a welfare program on the other. Your Social Security benefits are always subject to the whim of 535 politicians in Washington.”

Yet when some Republicans mention even partial voluntary privatization, there is a backlash.  while the private market admittedly offers much greater upside, people have also experienced substantial losses and that isn’t ideal for a social insurance program.

What is the answer?  Many Republicans demonize Social Security without acknowledging its intent, dwelling on the cost rather than addressing the fundamental flaws.  Meanwhile Democrats exploit the public’s ignorance to use preserving SS as a talking point, never admitting that there are far better ways to craft such a program.  If there was ever a doubt that Social Security in its current form has become a political tool, look no further than the ever-contradicting-himself Paul Krugman, who expressed great concern over the program in 1996 and agreed with Bill Clinton that “every single year we avoid resolving this, it will get harder and harder and harder,” and continued his expression of worry for years, only to back peddle in 2007 and ostracize those expressing similar concerns.   Sadly, this has become routine for economist-turned-pundit Krugman who has made similar about faces on minimum wage and other issues.

This is the typical “us vs. them’ black and white thinking that permeates our political landscape.  It’s unfortunate because better options are usually right in front of us…or sometimes, to the north.

Canada, for example, is a real, multi-faceted social insurance and pension plan:  a hybrid of a pay-as-you-go and private pension plan.   Canada has its own taxpayer-supported social security-type system for senior citizens of modest means, the the Old Age Security pension (OAS), but also provides the Canadian Pension Plan.  The CPP Investment Board states as “a global investment organization, we invest in public equities, private equities, bonds, private debt, real estate, infrastructure and other areas. “

While the OAS and CPP provide benefits somewhat comparable to Social Security, the contributions are much lower. As of  2013, employees contributed 4.95% of gross income between $3,500 and $51,100, up to a maximum contribution of $2,356.20. The employer matches the employee contribution, which totals 9.9% of pensionable income.  In contrast, Americans are currently contributing a total of 12.4% with a cap of $7,254 as of 2015.    Canada as well as the UK are also offering tax-free universal savings accounts and not just for retirement.

So Americans really aren’t getting a good deal.  There is much criticism of Wall Street for making a lot of money and the benefits of investing are mostly relegated to the top half of earners.  Most people would like to ride on the same train but also don’t want to put everything at risk, even if they have the wherewithal to invest.   Others are worried about educating the public about diversification.  Suggestions at even an option for a voluntary, partial use of one’s own social security contributions to be put in private accounts by President George W. Bush and Paul Ryan were soundly rejected and while the idea has great merit, it certainly presented challenges for transitioning.

America’s seniors are already the new middle class and have become that with a combination of Social Security, pensions and investments they made during the Post WWII boom.   The New York Times reports that today’s seniors have greater resources than previous generations but the trend is not likely to continue.  While paychecks may be larger, SS benefits may be smaller when today’s workers reach retirement age and today’s 401(k) savings plans are not guaranteed nor as generous as employer-sponsored pensions of the past.  States and local municipalities are also being forced to look at unfunded liabilities and overly generous promises made as they try to avert bankruptcy or some cases (Detroit) come out of it.

The best solution?  Most reasonable people, if educated, would presumably want the benefit of the private market without the risk.  is that too good to be true?  In private investments alone, yes…but what if the government worked in partnership with the market?

The Rise Up Theory of Economics, also known as The USA plan,  advocates the best of both worlds:  It redirects the payroll contributions presently paid by individuals and employers into personally-owned investment accounts that can grow into millions over the citizen’s working life. Instead of going to the government, the funds are invested in a unique USA (Universal Savings Account) in safe indexed stock funds that have historically been growing at over a 10% rate for the last 25 years and most importantly, the proposed enacting legislation would guarantee no reduction in benefits.  The accounts will be backed by the government and insured against loss; in other words, all of the upside with none of the risk.  In fact, if successful, the guaranteed minimum benefit could be increased in the future.

How much better would the economy be and how much less would seniors and others be reliant on govt benefits if they were able to retire at an average of 8x their current salary?  The potential is staggering:  even an minimum wage worker earning only $7.25 for a 40-year career (much less than anyone is likely to earn) is able to accumulate a nest egg of over $1.2 million and receive a $10,000 monthly benefit check.  Some of that would presumably need to be set aside to insure against loss but regardless, it is far more than Social Security provides now or ever will in the future.

Every responsible person who has the money to invest does so because of the returns.  There is no reason this opportunity should be relegated to only the top half of earners.

Real concerns, many of which are legitimate criticism of any type of privatization would have to be addressed.

  • Many people can’t manage their own money so the contributions still have to be involuntary.
  • A new plan shouldn’t cost the taxpayer more than it does now.
  • Taxpayer funds should be in trust and unreachable by politicians, Congress, taxes, courts, one’s creditors or spouses and by the taxpayer himself until retirement.
  • All present and future retirees without the time to accumulate substantial nest eggs must be guaranteed to receive the amounts presently paid under Social Security, Disability and Medicare.
  • Taxpayer’s funds cannot be managed by stockbrokers or investment houses; the trust will invest directly, bypassing commissions and other costs associated with brokers.
  • Taxpayers will have control over which bond or stock funds his or her money is invested in during their working life. These funds will track the steady upward movement of the market and grow with our economy.
  • No risky investments will be allowed.  Funds should be diverse and contain hundreds of quality stocks to avoid having a few crash the entire account.

Now the bottom half of earners won’t have to watch the top half reap the rewards of investing while hoping that someone such as a Bernie Sanders opining about income inequality will change things by raising taxes and minimum wage.   Ironically, it satisfies the supposed goals of those who will likely work hardest against it by turning the non-existent “trickle-down theory” into a windfall for everyone—something the actual supply-side economics advocated.

The USA plan, or one similarly crafted, creates and preserves wealth for anyone who works.  That is the first, most important and obvious benefit…but there would be many more.

The infusion of over $100 billion of new investment capital into the stock market every month would be a powerful force against economic stagnation and provide capital to accelerate job creation.  It should put the economy into overdrive.  By doing so, as well as creating much greater wealth in retirement, it could also be the impetus for paying off all debt and unfunded liabilities, followed by taxing Americans at much lower rates.  Long term, it could possibly reduce or eliminate the need for separate government pensions and Medicare,  end the need for businesses to independently fund retirement plans and potentially reduce the size of government dramatically by eliminating much of the bureaucracy dedicated to social service administration.  The creation of wealth could even dramatically reduce crime.

But the opportunity for such a system goes even further by providing a bipartisan, in fact non partisan, solution to the desires of both parties.   Dick McDonald, creator of the Rise Up Theory / USA Plan, elaborates:

“Faced with the competing interests of right and left – Republicans and Democrats – it was up to me if I was to construct a new economic theory to meet certain basic requirements of both philosophies. The right has always been focused on ways to increase the flow of capital into the equity markets to keep the economy growing.   On the other hand, Democrats and their many diverse special interest groups continue to look to the state for answers to their varied social and economic needs and to finance their myriad of programs by taxing the rich. “

Many assume that wealth is finite and we must take from the rich in order to give to the poor and hence, ostracized supply-side economics by falsely portraying it as “trickle down.”  The USA Plan actually does what true supply-side endeavors to provide:  greater access to capital and lower tax burdens for everyone.   It meets the demands of both parties by increasing the wealth of the “have-nots” without taking anything away from the wealthy.  The only ones who may be disappointed are those who truly believe that great wealth should not exist.

McDonald continues:   “Create an economic theory that does both… It is going to be an involuntary rain storm of mammoth proportions for all classes of Americans and substantially close the gap between the rich and the poor.”

This plan is actually relatively simple in concept and execution.  The only real complication is in transitioning over.  It is long past time for all Americans to understand that our leaders have a propensity, even when intentions are good, to create overly complex, mediocre and often poorly performing solutions to society’s ills.  Our tax code is probably the best example but Social Security is another.  The creation of great wealth for all Americans is not an unattainable pipe dream and would go a long way in helping to alleviate a lot of other social welfare issues that divide us, as well as lessening the need for relying on government to solve them.    Government is here to provide support where the private sector isn’t sufficiently incentivized to do the right thing; it isn’t supposed to take its place.

The Democrats have championed—and guys like Bernie Sanders wish to expand—programs that are fundamentally flawed and don’t provide the kind of “relief” that the USA Plan could.  Meanwhile Republicans have offered half-baked solutions that offer upside but lack provisions ensuring that Americans without the wherewithal to invest wisely or cover their losses won’t be at risk of losing everything.

Of course, if we solve this problem, there might be far fewer special interests left to pander to.  In fact, if we truly eliminate poverty, we’ll have to find someone else besides the wealthy to demonize.

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One thought on “Yes, it’s time to replace Social Security, not fix it

  1. Pingback: OPINION: Social Security Doesn't Need to be Fixed... It Needs to be Replaced - IVN.us

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